The Accounting Equation

ASSETS = CAPITAL + LIABILITIES

Total Resources in Business = Resources Invested by Owner + Resources Invested by Outsiders

The business need resources to operate.  The resources owned by the firm are called Assets.  It receives these resources mainly from the owner, which is called Capital.  Since the owner may not be able to fully supply all the resources needed, some of these resources will be provided by outsiders, which are called Liabilities.

CAPITAL = ASSETS - LIABILITIES
LIABILITIES = ASSETS - CAPITAL

Example 1:













Example 2: